During the Budget 2021, Finance Minister changed the EPF taxation rules. Effective from 1st April 2021, employees EPF contribution above Rs.2.5 Lakh Taxable.
As of now, whatever interest you earn on the contribution of your EPF and VPF was tax free. However, effective from 1st April 2021, it is not the case.
Interest earned on the contribution over Rs.2.5 lakh a year is taxable for you.
The reasons quoted during the Budget 2021 is as below.
“Instances have come to the notice where some employees are contributing huge amounts to these funds and entire interest accrued/received on such contributions is exempt from tax under clause (11) and clause (12) of section 10 of the Act”
Let us take two example. Assume that your monthly contribution a month is Rs.20,000. This means your yearly contribution is Rs.2,40,000. This is below the Rs.2,50,000 limit. Hence, the interest earned on this contribution is as usual tax free.
However, assume that you are contributing another Rs.10,000 along with a default Rs.20,000 monthly contribution. Then the yearly contribution will be Rs.2,40,000 (default EPF contribution) and Rs.1,20,000 (VPF contribution). So in total, you have contributed Rs.3,60,000, which is above Rs.2,50,000 limit set during this budget.
Hence, the interest earned up to Rs.2,50,000 is tax-free. Interest earned on the remaining Rs.1,10,000 is taxable for you. You have to pay the tax on it as per income tax slab (Refer the latest Income Tax Slab at “Latest Income Tax Slab Rates for FY 2021-22 / AY 2022-23 | Budget 2021 Key Highlights“.
However, as EPF interest is on yearly compounding, from next year whatever the interest you earn on this Rs.1,10,000 is tax-free for you.
Note:- Refer our latest post “Investing more than Rs.2.5 Lakh in EPF is still the BEST strategy!!” before taking into any action on your EPF contribution.
Conclusion:-I think it may be the biggest jolt for those who were enjoying the tax free interest on their EPF and VPF contribution. However, as the subsequent years’ interest on such contribution is tax free, I still feel EPF and VPF are the best option for your debt part of retirement goal.
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